Can Sina Leverage Growth In The Chinese Online Advertising Market?

Sina (NASDAQ:SINA) is an online media company that also offers mobile value added services in China. It provides services through SINA.com (online news and content), Weibo.com (microblog) and SINA Mobile (MVAS).

Having blocked more than 2,000 websites under its policy of internet censorship, China is known to have the most stringent internet censorship laws. ^[1] The ban on some of the most popular U.S. social networking sites such as Facebook and Twitter, increases the growth opportunity for Chinese internet companies such as Sina, Baidu, Sohu and Yoku.

Despite the rapid growth of China’s Internet market over the years, Sina’s stock price has declined from a peak of $133 in April 2011 to around $46 at present. Declining market share, increasing operating expenses and the slow progress in capitalizing its micro blogging website Weibo, are some of the factors that have eroded the stock value.

Though Weibo does not contribute much to Sina’s revenue at present, we believe that it will be an important factor for stabilizing the company’s share in the Chinese online advertising market. The increasing investment in the platform will start paying off as Sina witnesses higher monetizing benefits from Weibo.

The Chinese online advertisement market is growing at a rapid pace. We believe that the increasing investments in developing Weibo will equip Sina to successfully leverage future growth in the market.

Check out our complete analysis of Sina

China’s Advertising Market Continues To Grow

China is one of the the fastest growing economy in the world. Despite global macro-economic weakness, the Chinese online industry is still growing rapidly. The total number of Internet users in China (513 million) is twice that in U.S. (245 million), and we believe the former still offers high growth opportunities for Internet companies. As per Internet World Stats, the Internet penetration in China is close to 38%, while that in U.S. is over 78%.

Along with the rise in overall internet users, the Chinese online display advertising market has grown substantially in the past few years, from $1.2 billion in 2007 to $4.8 billion in 2011. In addition to the increasing internet penetration, the rising disposable incomes and the growing popularity of PCs in China are important factors contributing to growth in online advertising.

While we agree that the growth rate has slowed down due to macro headwinds, we estimate the online display ad market in China to almost double by 2019, as companies are shifting their advertising budgets from traditional to online advertising.

Assuming our estimate for Sina’s market share remains constant, if the Chinese online display ad market increases to $15 billion by 2019, there would be a 17% upside in our price estimate for Sina.

Factors That Could Slow Down Online Advertising Growth in China

Though the majority of factors point toward an expanding online advertising market in China, there are few factors that could restrict growth.

Stringent government regulations – The Chinese government has enacted an extensive regulatory scheme governing the online operation of business in the country. Any adverse policy change by the government could impact the estimated growth in online advertising.

Uncertainties in advertising market in China – Advertising market in China is still in its nascent stage of growth. Advertisers have limited experience with the Internet as an advertising medium. Traditionally, they have not devoted a big portion of their advertising expenditure for web-based advertising. Additionally, the increasing use of advertising blocking software may result in advertisers reducing their dependence on the online advertising medium.

If China’s online display advertising market increases to $9 billion, compared to our estimate of $12 billion, there would be a 15% downside in our price estimate for Sina.

Factors That Can Drive Sina’s Growth In The Chinese Online Ad Market

Sina derives over 75% of its revenues from online display advertising, and to a lesser extent from sponsorship arrangements. Sponsorship arrangements allow advertisers to sponsor a particular area on its websites in exchange for a fixed payment over the contract period.

While the Chinese online display market has grown rapidly, Sina’s market share has declined over the years. Sina has lost almost 50% of its market share in the Chinese ad market since 2008, from 14.1% in 2008 to an estimated 7.7% in 2011.

Sina has diverted a substantial proportion of its operating expenses to develop the Weibo platform, as it expects the micro blogging website to become a significant revenue contributor. The company spent around $110 to $200 million in 2011 for Weibo, and an estimated $160 million in 2012. ^[2]

Weibo’s Expanding User Base

Analogous to a hybrid of Twitter and Facebook, Weibo has been increasingly gaining popularity among users in China, and is estimated to be used by 30% of Internet users in the country by 2013. ((China’s Weibovs US’s Twitter: And the Winner Is?, Forbes, May 17, 2011)) Weibo continues to attract an expanding user base and receive higher user activity. In Q3 2012, the total number of registered users on Weibo increased to 424 million, a 15.2% increase from 368 million users at the end of June 2012. Additionally, the average number of daily active users increased by 16% in Q3 2012, reaching 42.3 million.

Last year, Sina launched a new product named Weibi, which is fully connected to the Weibo platform and allows users to participate based on topics and interests, as opposed to user relations. Additionally, the company recently launched an updated version of Weibo, which apart from improvising the existing profile page, also offers an added feature that allows users to privately share information and content among close circles. By enhancing the overall user experience, we think the new products will expand Weibo’s user base and increase user stickiness on the platform.

Increasing Monetization Efforts for Weibo

Despite considerable investment in developing the platform, Sina has not been able to generate significant monetization benefits from Weibo, so far. However, it took a number of steps in 2012 to accelerate its monetization efforts. It launched the Weibo display advertising system for brand advertising in April 2012. By incorporating a social and Internet graphs recommendation engine the new system allows advertising to be more targeted, thereby increasing its relevance.

Additionally, Sina started testing the advertising system in a news feed, which targets small and medium-size enterprises, in Q3 2012. This advertising system allows any user to place sponsored feed at the top of the news feed for its followers.

Advertising revenues from Weibo as a proportion of Sina’s total advertising revenues increased to 16% in Q3 2012 from 10% in Q2 2012. We expect the proportion to be even higher in the coming quarters.

Increasing Mobile Internet Initiatives

With the increasing adoption of mobile devices among users, Sina has witnessed a strong shift from its PC to mobile terminals across its product lines. In its Q3 2012 earnings call, Sina declared that around 72% of its daily active users accessed Weibo either through mobile or through both mobile and PC in September, compared to 69% in June.

Expecting to see a continuous increase in mobile traffic in the future, Sina has adopted a strategy to make mobile the first priority for any current product development as well as for its other future product initiatives.

Sina entered into two important collaborations to enhance its mobile platform last year. In July 2012, it entered into a partnership with Baidu, China’s primary search engine, by collaborating on five key aspects namely search, content, platform, technology and resources. Sina plans to integrate Baidu search into its mobile site. In December 2012, Sina entered into a partnership with AutoNavito, to enhance social networking as well as navigational aspects of its current mobile offering.

Thus, we believe that the above initiatives will help Sina better monetize its Weibo platform. Higher revenue contribution from Weibo will help stabilize Sina’s declining share in the Chinese online advertising market.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Websites Blocked By The Great Firewall Of China – GreatFire.org [↩]
2. Sina watches 70 pct of market value evaporate over a year, Morning Whistle, December 7, 2012 [↩]